Every month, I publish an investment note called “Ivan’s Reflection”. The purpose is to document my thoughts process so I can review if they are right and wrong in the future. This creates transparency for my clients and people who are interested in my investment management services. It also forces me to be accountable for my investment decisions so I can improve in the future.
2020 started with some interesting notes. The dynamics of the market have made some swift shifts but most are within the expectations of my earlier GMC updates. The key investment opportunities and risks of this year are as below.
- Recession is not coming, yet.
- Stock markets are moving from income to growth, if you are still searching for income, you need to search from emerging markets.
- The recent commodity and China stock market rally does not mark the end but the start of a bull cycle.
- The REIT investment cycle is almost over, be careful about it.
- Healthcare could be the next biggest investment theme.
Recession is NOT coming
One rule that I obey faithfully is that when there is too much consensus in the investment market, it generally won’t happen. Many “experts” predicted that the global financial crisis is going to happen this year. While we cannot rule out the probability, I think the chance is rather slim. If you know it is going to rain, you will bring an umbrella and you won’t get wet. Throughout history, the financial crisis always happens when you are least prepared.
The situation now is that the global market is not driven by fundamental but money flows (review my Aug 2019 updates: “chase winners, shun risk and ignore valuation”). The global central banks have this “privity” that they do not have enough room for monetary policy manipulations (to save the market) due to the ultra-low interest rate. So they will collectively take precautious measures. The US Fed’s 3 rate cuts in 2019 and China’s cutting of banks’ reserve requirement ratio on the first day of 2020 are perfect examples. And “whatever it takes” is what is sustaining the market euphoria now.
Stock markets are moving from income to growth
I have already predicted this in my Nov 2019 update that the market was shifting focus from income investing to growth investing (review my Nov 2019 update: Income to Growth Rotation). So it is no surprise to me that the GMC Growth Portfolio has done better than the GMC Income Portfolio for the same period. The income assets globally are generally overpriced at this junction and the risk/reward ratio for growth investing looks better for 2020.
The commodity rally has not finished
I have repeated the gold proposition throughout my updates in 2019. In fact, the price movement of gold was just the lead. I believe the entire commodity sector, from silver to oil, from soya bean to wheat will eventually catch up. The commodity sector will be the last relay of this long cycle.
Oil price shot above $70 a barrel after US airstrike in Iraq killed top Iranian commander Qassem Soleimani last Friday. If you follow my comments for a while, you know my belief that there is no coincidence in the financial markets. US strike was just a booster that will accelerate the energy price recovery process which was already happening.
China stock rally has just started
My recommendation to allocated to China stocks was not well received but it is understandable. It is easier to tell you to buy Google or Apple shares, trying to explain China stocks should be your highest allocation is always an uphill task.
Additional Reading: Why should a foreigner invests in China A-shares.
The REIT investment cycle is almost over
When every new or existing client comes to my office and asks about REIT. I know that there is limited upside. REIT is a big topic of the retail investors now, but the institutional investors are gradually getting out. In fact, REIT (especially Singapore REITs) has peaked in July 2019 which I have advised you to sell or reduce. REIT is a good asset class to own, but the price you pay matters.
It is healthcare’s turn
Admitted or not, we are in the late cycle of stock investment. The US had the longest bull run in history and it was artificially sustained. The stock may continue to rally another one or two quarters, but the risk/reward has become increasingly unfavourable. However, not all sectors will suffer during the period of late-cycle and recession. Trillions of the money in the world has to flow somewhere. The commodity is one which I highlighted earlier, the other could be healthcare.
Global infrastructure, central banks’ last straw
If my earlier assessment was correct. The central banks have limited means to use monetary policy to “save the market”. They will have to resort to fiscal policies. What the government would do is to spend on infrastructures during the recession. Thus infrastructure stocks may benefit eventually.
Emerging market bond, where you still can find income
If you are a fixed income investor, you were blessed last year with a big rally in the global bond market. But it is nothing to be happy about. Bond investing is different from stock investing. While earnings revision can boost the stock markets in the long run, bondholders are only entitled to a fixed coupon. This means that the bond price has to be corrected sooner or later. We may see a big rotation from the investment-grade bond to emerging market bond once the bond managers feel that the rate is about to increase.
Alternatives, where you can hide
How to invest when everything fails? You need to have certain investments that are totally uncorrelated with the stock and bond markets. For Accredited Investor clients, you may allocate some absolute return strategies in your portfolio.
Which is better, growth or income?
I got this question a lot. It is tempting to switch from one strategy to the other when you heard certain asset classes were doing well in the last quarter. The fact is, different strategies perform well in different periods. Both GMC income and growth portfolios have performed similarly last year, but you see some divergence this year.
The market doesn’t care about you
My advice, as I have talked to some of you previously, is that focusing on your investment goals instead of the market. The market has nothing to do with your investment objectives, be in retirement or your children’s education. Don’t be too carried away when the stock market is good, and don’t be too worried when it seems that the world is falling.
I can help you to sail through this rough water but you have to stay on board.
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